New tax guidance announced this week by the IRS could result in lower refunds for Coloradans who file itemized returns. Governor Jared Polis, who opposes the idea, said the proposal would reverse 30 years of taxing history by classifying TABOR refund checks as gross taxable income for those tax filers.
"It seems like common sense, and it is common sense that a tax refund should not be taxed," Polis said at a news conference in Denver Thursday. "Unfortunately, the IRS doesn't always follow common sense."
Colorado voters passed the Tax Payers Bill of Rights (TABOR) Amendment to the Colorado Constitution in 1992. It sets caps on how quickly government revenue can grow. When state revenue exceeds the cap, the surplus is to be refunded to the citizens. The first TABOR refunds were issued in 1999.
"There’s not a TABOR refund every year," Governor Polis said. "It’s only when the economy is strong, we have a very strong economy now. It’s looking good for another refund year."
The IRS does not tax disaster relief payments, and the guidance document notes that 17 states enacted programs giving direct payments to citizens in response to economic hardships brought on by the COVID-19 pandemic. However, the federal emergency declaration for the pandemic ended in May.
Yet, the proposal does not impact all Colorado taxpayers equally. Those who filed federal returns claiming the standard deduction would not see the TABOR refund amount counted against their tax liability. However, those who filed itemized returns would.
The publication points to the 2017 Tax Cuts and Jobs Act as the legal basis for this requirement.
"Individuals who claimed the standard deduction (as most do) will not include State tax refunding in Federal gross income because they would not have previously deducted on their Federal income tax returns the refunded amount of State taxes paid," the document reads.
"Individuals who itemized deductions and deducted for Federal income tax purposes the amounts of any State taxes paid, however, generally are required to include the State tax refunds in the gross income on their Federal income tax returns."
The Tax Cuts and Jobs Act was passed by Congress during the Trump Administration and eliminated what are known as SALT deductions for State and Local Taxes. Those deductions had let taxpayers in states with high property taxes reduce their federal liability by up to $10,000.
Colorado Senators John Hickenlooper and Michael Bennet
"TABOR is a refund of Coloradans' hard-earned tax dollars, not new income," Sen. Hickenlooper said in a statement. "The IRS has agreed for 30 years. We're not going to let that change now.”
"For 30 years, the IRS has not taxed TABOR refunds – and it makes no sense for them to start now," Senator Bennet posted on social media. "I'm committed to working with the IRS to ensure TABOR’s precedent is respected and that Coloradans can keep the money they are entitled to."
Wednesday's notice from the IRS is a notice requesting comments. The agency wants feedback about specific aspects of state programs or situations where federal tax guidance would be helpful.
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